Online Video Shakeout To Get Worse As Buyers And VCs Run For Hills

Conversations with bankers, VCs, and a senior online video exec suggest the brutal shakeout in online video will continue if online advertising doesn’t see a meanindgful recovery soon.

As we pointed out yesterday, more and more bankers and VCs are seeing online video companies seeking to raise cash and in many cases an exit. Online video is a capital-intensive business, with heavy bandwidth and content licensing costs, so the companies scarf down cash. At the same time, very few acquirers are willing to look at big acquisitions in the $300-million-plus range (most deal discussions appear in the below $100 million range).

The problem is that many of these sites raised a lot of VC cash when money was flowing and now must cash out at big prices in order to generate VC-like returns. And those big exit prices aren’t there.

Many companies are trimming into muscle as they seek to raise cash and weather the weak online ad environment. If things don’t improve significantly soon, however, something has to give.

Here is a good example that captures the crux of the issue. A leading online video aggregator that raised tens of millions of dollars in recent years is currently facing challenges raising funding. The company has responded by:

Cutting its advertising and marketing spend (it had been buying a lot of traffic).

Firing its entire internal salesforce and hired a third-party to sell its inventory as part of its network (likely at lower rates)

Cutting into muscle in this way can have a snowball effect on a company. For example, in the case above:

Traffic falls considerably.

Ad-sales are lumped into network pitches, hurting rates and branding with the agencies, and ultimately hurting revenue growth.

VCs get increasingly disgruntled and stingy with their cash, leading to more muscle being cut.

And on and on.

Here is a graph illustrating what happened to this site’s traffic the past year:

Clearly, this is not the direction any site wants to be heading. If revenue doesn’t start to turn the corner soon we think online video aggregators like this one that are short on cash and trying to ride out the storm by cutting into muscle will either

Sell at firesale prices.

Shut down.

What video sites are best positioned, in our opinion?

Aggregators with a lot of money in the bank (duh)

Content producers/owners who can build their own sites, but also distribute their content to multiple aggregators, receiving a share of revenue from each, and diversifying themselves to ease the impact of a couple going under.